Brazil’s 10-Year Yield Rises on Political Risks

Brazil’s 10-year government bond yield rose to around 12.94%, up from the two-year low of 12.60% reached on October 5th, as bonds came under pressure amid a narrowing lead for Flávio Bolsonaro over President Lula in runoff polls. Recent surveys reinforced the perception that the incumbent has gained momentum in recent days, prompting investors to reprice risk premiums across the yield curve. Although Flávio Bolsonaro has yet to present detailed policy plans, investors view him as more likely to pursue fiscal reforms, including spending cuts, which are seen as essential to lowering interest rates. Questions also remain about the fiscal discipline of a potential Flávio administration. Political pressure has already prompted the candidate to change his position and support ending the six-days-on, one-day-off work schedule, which the Senate approved yesterday. In addition, the amendment’s approval is also being viewed as a political victory for Lula’s government.

Brazil’s 10-year government bond yield fell to around 12.68% in October, reaching a two-year low amid a rally in domestic assets driven by the election outlook. The first voting-intention polls released after the first round confirmed Senator Flávio Bolsonaro’s lead over President Lula in the runoff scheduled for October 25th, although some results remained within a statistical tie. Markets view Bolsonaro as more fiscally restrictive, and his lead strengthened expectations that a potential administration could tighten control over public spending and take steps to improve Brazil’s fiscal position. Lower pressure on public finances could reduce the risk premium demanded by investors, while tighter fiscal policy could ease inflationary pressures, potentially allowing the Central Bank of Brazil to cut interest rates more quickly.

Brazil’s 10-year government bond yield fell to 13%, reaching a near one year low after Flávio Bolsonaro finished ahead of President Lula in the first round of the presidential election, defying most polls. The result triggered a sharp repricing of Brazilian assets. Senator Bolsonaro received 47.03% of valid votes, compared with 45.16% for President Lula. Bolsonaro outperformed the average of polls tracked by Goldman Sachs by more than four percentage points. The senator is viewed by markets as more fiscally restrictive, amid elevated domestic yields and weak business activity. The result strengthened expectations that a Bolsonaro administration could pursue tighter control of public spending and measures to improve Brazil’s deteriorating fiscal position. Lower pressure on public finances could reduce the risk premium demanded by investors, while contractionary fiscal policy could ease inflationary pressures. These factors could allow the BCB to cut interest rates more quickly.